How bad is it to have a lot of credit available but not used?

I had a very financially astute reason for getting my first credit card: it was freshman orientation day at college, and one of the banks was giving away free t-shirts to new credit card customers. When I signed into the card’s website to pay my first bill, I noticed a “request credit limit increase” button. I pressed that button several times over the next few months, because I figured it would be good to have access to money in case some kind of emergency arose.

I was probably able to raise my limit six or seven times before the system finally told me that I’d have to call a human being to get it increased further. (I didn’t call.) No emergency ever came up, and I never use all that credit. I think I’ve gone over 50% of my credit limit a total of one time since the card has been open.

As I mentioned in my previous question, a banker recently suggested that I carry a small balance on my credit cards, and that the optimal amount to carry per card is proportional to the card’s credit limit. Later in the conversation, she said that it might be a good idea to call my credit card company and ask for a reduction in my credit limit, both to reduce that optimal amount and to prevent me from getting hurt by having too much unused credit available.

“No, there’s nothing about having a lot of credit available that can hurt your score,” says Paperno. “In fact, all other things being equal, more revolving credit availability can, for some, mean a lower credit utilization ratio (balances compared to credit limits), which can actually help the credit score.”

So if your credit card issuers have been especially generous with your credit limits, don’t worry that those high limits will tank your scores.

So, who’s right here? Are the “too much total credit available” and “not using a big enough percentage of your available credit” situations potentially damaging? If so, how much? Either way, why?

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2 Responses to “How bad is it to have a lot of credit available but not used?”

While @BrianRogers makes some good points, there are a few things you need to consider from the FICO perspective that I want to lay out simply for you:

If you have credit that you don’t use, it will eventually be
considered “dormant” in the calculations and therefore will do you no
good, in the credit/spending ratio or credit worthiness. Your
worthiness is based on how you responsibly use your credit, not how
much you can hoard. SO in that respect the advice to use it and carry
a balance one in a while is valid to prevent dormancy. However,
always pay it off in full before getting hit with finance charge. The
dormancy is dependent on the creditor, sometimes its as little as 45
days of non-use and sometimes up to 6 months. So to err on the side
of caution, I would say put a cup of coffee or a dinner on the cards
you don’t use often once a month and then pay it at the end of the
month.

It is never recommended to carry more than 2-4 major credit cards
anyway. A Mastercard and a Visa are pretty much all you need. But you
can go up to 4 cards if you want to also have an American Express
and/or Discover. But anything more is unnecessary and often will hurt
you in the worthiness evaluation. Also stay away from carrying cards
that are not top-tier credit. Meaning avoid the low-end Capital One,
Household, Orchard and such cards as they have a cap on how high your
limit will ever get and they don’t do you any good. Opt for top-tier
cards if you have a good enough credit as they can reach up to 20k in
limit and are valuated higher in your worthiness.

While you want to trim your credit and stick to a strong core,
don’t open and close accounts too often, and certainly don’t close
before a year and don’t open more than 1 every 2-3 years because you
will kill your average length of credit each time you introduce a
new, younger card and/or lose an older card. You want to your average
to be about 6-8 years to do you any good, anything less shows you as
being less established and therefore less credit worthy. Just a few
things to consider.

Unless you have a history of over-using credit (i.e. you’ve gotten yourself into debt trouble), then I think that the banker is giving you bad advice in telling you to get your own credit limit reduced. Having more credit available to you that is left unused will make your utilization ratio lower, which is generally better for your credit score, according to this article on CreditKarma.com. The “sweet spot” seems to be 1-20% utilization of your total credit. (But remember, this is only one factor in your credit score, and not even the biggest– having a long history of on-time payments counts the most.)

My own personal experience seems to bear this out. I have two major credit cards that I use. One card has a high credit limit (high for me anyway) and I use it for just about everything that I buy– groceries, gas, durable goods, services, you name it. The other card has a limit that is about 1/3 of the first, and I use it for a few recurring bills and occasional purchases where they don’t take the first card. I also have a couple of department store cards that I use rather infrequently (typically 1 purchase every 3 months or so). At the end of each month, when the respective statements post, each card has a balance that is 15% or less of the credit limit on that card. I pay off the entire balance on each card each month, and the cycle repeats. I have never been late on a payment, and my credit history for all of these cards goes back 10 years. My credit score is nearly as high as it can go. If having unused credit were a detriment, I would expect my score to be much lower.

So, no, having “too much credit available” is not going to hurt you, unless you are not using it at all, or are tempted to abuse it (use too much). The key is to use common sense. Have a small number of cards, keep them active, spend within your means so you can pay off the balance in full after the statement posts, and never be late on your payments. That’s all it takes to have good credit.